BankFinancial Corporation (NASDAQ:BFIN)
Q4 2015 Earnings Conference Call
February 03, 2016 10:30 AM ET
F. Morgan Gasior – Chairman and Chief Executive Officer
Paul Cloutier – Chief Financial Officer
Brian Martin – FIG Partners
Scott Levitt – Private Investor
Good day, ladies and gentlemen and welcome to the BankFinancial Corp Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded.
I would now like to introduce your host for today’s program, F. Morgan Gasior, Chairman and CEO. Please go ahead.
F. Morgan Gasior
Good morning and welcome to the fourth quarter 2015 investor conference call. At this time, I would like have our forward-looking statement read.
Unidentified Company Representative
The remarks made at this conference may include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. We intend all forward-looking statements to be covered by the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of invoking these Safe Harbor provisions.
Forward-looking statements involve significant risks and uncertainties and are based on assumptions that may or may not occur. They are often identifiable by use of words believe, expect, intend, anticipate, estimate, project, plan or similar expressions. Our ability to predict results or the actual effects of our plans and strategies is inherently uncertain and actual results may differ significantly from those predicted.
For further details on the risks and uncertainties that could impact our financial condition and the results of operations, please consult the forward-looking statements declarations and the risk factors we have included in our reports to the SEC. These risks and uncertainties should be considered in evaluating forward-looking statements. We do not undertake any obligation to update any forward-looking statements in the future.
And now, I’ll turn the call over to Chairman and CEO, F. Morgan Gasior.
F. Morgan Gasior
Thank you. We filed our press release and our five quarter supplement, but the Form 10-K annual report will be filed in a couple of weeks, so all filings are not yet complete. Accordingly, I thought I would provide a brief overview of how fourth quarter 2015 went and how we wound up 2015 and out I’ll be happy to open it up for questions at that time.
So as you saw from the information we provided, we had about $70 million of net loan growth in the fourth quarter and that contributed a little over $2.5 million of net interest margin going into 2016, nice balanced loan growth across all of our segments. So we finished the year strong in that respect.
Earnings for the fourth quarter were also good. The main variance in the quarter was compensation expense. We went up just about $700,000 in comp expense. All of that was incentive related comp, either the loan production or hitting other goals that were achieved in the fourth quarter and therefore, the funds had to be accrued. Our base comp actually went down by about $24,000 quarter-over-quarter.
And we grew about $32 million of deposits. Of that about $10 million to $15 million is seasonal in nature related to holiday activity in and out, credit card bills in and out. But again for the fourth quarter, we saw some good deposit growth and that helped fund the loan growth that we saw in the fourth quarter and we’re expecting for 2016. So we were pleased to see that both sides of the balance sheet were working well.
The net interest margin expanded quarter-over-quarter by about 3 basis points. The net interest spread expanded by about 2 basis points. As I said, deposits increased year-over-year. The non-interest income also increased year-over-year, but the ATM debit card revenue that we usually see in fourth quarter was somewhat muted. You’re just seeing – continuing to see the effects of other types of payments affecting that transactional volume and also we’re seeing a little bit more in fraud-related volume that we’ve had to take some additional fraud prevention steps on.
Wealth management, insurance and trust also we started to see some modest positive trends along the lines of what we expected. Fourth quarter is always good for insurance because of some seasonally scheduled renewals. And we also took some steps to realign the costs in the property and casualty unit to more closely match the marginal revenue opportunities we’re seeing in that segment.
As I said earlier, expenses were stable. Again the volatility was really the incentive on the equity comp. And other than that, in all the segments, we achieved our budget targets and kept the lid on expenses as we expected. Capital, our capital management was strong for the year. Tangible book value of share went up year-over by about $0.25. Our Tier 1 leverage capital ratio increased. Our Tier 1 risk-based capital ratio decreased just slightly despite the fact that we grew loans 8% and only declined 1.2%.
And that’s in the large part due to our 50% risk-based capital treatment for our multifamily apartment loans that increased to a record level. And we’re expecting that portfolio will continue to perform strongly and contribute some additional capital strength going forward. As you saw, we achieved and actually slightly exceeded our asset quality goals; 29 basis points for non-performing loans, 70 basis points for non-performing assets. We think we can still improve that a little bit based on the metrics we see right now, but it’s really getting to the point where it’s reflecting the quality of the portfolio we have.
Based on those things, we’re still going to – we’re still running the annual stress tests on the resultant loan portfolio. We do expect those stress tests to be consistent with prior years. And accordingly, the board was comfortable increasing the dividends to $0.05 a share effective immediately. And as you saw previously, they extended and expanded the share repurchase plan. We’re starting the year with 20,200,000 shares outstanding and the goal is to see if we can get to 19 million shares outstanding depending on market conditions.
With that in mind, I think that provides kind of a snapshot of how fourth quarter 2015 and the year-end work growth. I’ll be happy to take questions.
[Operator Instructions] Our first question comes from the line of Brian Martin from FIG Partners. Your question please.
Good morning, Morgan.
F. Morgan Gasior
Good morning, Brian. Happy New Year.
Happy New Year. So can you – congrats on the loan growth in the quarter. I just wanted to just maybe get a little color on just kind of your outlook kind of as you go into 2016, just kind of how you’re thinking about things and if anything has changed now that the kind of activity you’ve seen in the fourth quarter, maybe some of it was seasonal. And then just piggybacking on that, just maybe all in one, maybe can you just talk a little bit about the capacity you have to still grow based on kind of the commercial portfolio and the current charter, maybe possible restrictions just as we think about 2016 in the context of how you’re thinking about growth?
F. Morgan Gasior
Sure, be happy to. And as you saw, we saw more C&I growth than we did real estate growth. And that will ultimately start to press on certain limits in the existing charter and the board has started to evaluate the different opportunities there. There’s no immediate pressure, but given the business planning and the growth we have seen so far, it’s something that they’ve started to take a look at. Part of it is a classification issue and if everything stays in the right bucket, it’s fine. But as all the buckets grow, it could ultimately prove to be an issue.
As far as growth is concerned, I think one of the things you want to take a look at is, if you say we grew $70 million in the fourth quarter, you really look at a two quarter average and say $35 million per quarter. That seems like a good run rate us when we’re hitting on our cylinders most of the time. That’s ultimately we’ve been trying to achieve. The issue, as we said before, is sometimes transaction timing is out of our control, but we still feel good about all of our segments.
Certainly, there’s going to be some challenges in 2016 and potentially more than you might have thought even a month ago given what’s been the market volatility we’ve seen just contributing to uncertainty. But in the multifamily space, we’re still seeing that as a good core portfolio with good core characteristics. We continue to diversify our markets, so we don’t have a concentration or dependence on any one market.
Given where rates are now, refinances will probably be a little bit more of a play in 2016 than they might otherwise have been. But you’ll still see refinance volume just because of maturities that’s just borrowers are going to get a little more of the benefit of the potentially lower yield curve. And that that might contribute to a certain amount of delay in timing and that’s really what you saw in the third quarter versus fourth quarter. Borrowers didn’t see any real impetus to move in third quarter and all of a sudden when the curve started to shift upward, people got off of square one and started moving, so we’ll see if that history repeats. But we started the quarter with a very strong comparative pipeline from for the quarter compared to first quarter of 2015.
So right now, we’re feeling pretty good about multifamily. We released a couple of new products that give a core professional investor some additional tools to manage their portfolio, be a little more flexible in how they handle the structure of their portfolio, gives us some opportunities to do more flexible deals and get a greater share of the market compared to a lender that has only one product like Freddie Mac with only a term structure. So we would come up with some new ideas to capture good quality loans and give the borrowers some additional choices.
On the leasing side, that had a particularly strong quarter. Really all the cylinders did work there and that’s again seasonal for us, but they are also sitting on a good pipeline for the first quarter. Again, the issue there is timing and the bids that are out there that the lessors have put out, will they be hit; will they be hit on schedule. But once again, the products that we put out for the independent lessor, our mission is to serve the independent lessor, seem to be resonating and they seem to be bringing in some additional opportunities for us.
So our mission in 2016 is to maximize those relationships as we can, still an extremely competitive environment, and we continue to see spread compression in virtually every segment of that market, but especially so in the middle tier of the credits as opposed to the top tier. And at the same time, we’ll continue to look to expand on the base of lessors that we’re not currently working with or we haven’t done as much with to further diversify our opportunities.
And on the C&I side, the healthcare side that continues to evolve. We’re working with skilled nursing facilities, we’re working with hospitals. We’re working with Ambulatory Surgical Centers. There we’re looking at participating in the growth of absolute healthcare dollars. Now the industries and their payment structures and their cost structures continue to shift, but there’s no question it’s still one of the growth engines of the American economy, especially based on demographics and we’re aligned with that trend. But, again, a very competitive environment.
The strongest facilities usually have multiple bids. We tend to play in that market where the opportunities make sense. Then we also look at smaller opportunities as they arrive. So if you were to think about 2016 from a growth perspective, if we could grow anywhere – first quarter depends on what closes, but if we could grow $25 million to $35 million on average a quarter or do slightly better in the fourth quarter as we sometimes do, that would provide that 8% to 12% annual loan growth that we’ve been trying to hit.
And if you look at what we’ve done over the last three years or so, in the commercial loan portfolio, sometime this is masked by the payoffs in residential, but we have been growing pretty consistently around 9% to 10% in the commercial loan portfolio and that is the continued focus. We’re not necessarily interested in loan growth for loan growth. We won’t just do a deal to get the growth. But if it fits within our core lines of business and it makes sense to do it in the context of things, we’re absolutely going to look at every opportunity we can.
Okay. Perfect. And just back to the charter and the limitations on commercial. Can you just give any – I guess where are there limitation today, I guess, that you are not able to – I guess where growth would be limited by the 20% on assets of the commercial side based on kind of where you’re at today?
F. Morgan Gasior
Well, one within that those percentage limitations and the good news is, in large part, those are asset limitations. So as the balance sheet expands so do the limitations, but there are a variety of ways to group and classify and subgroup loans, and let me turn this over to our CFO, Paul Cloutier, and he can explain more about how those groupings work.
So, Brian, you start with the basic 20% limit of assets for commercial lending under a thrift charter and 10% of it has to be small commercial, which is basically a $2 million dollar loan and below. So that’s 20% on a balance sheet of $1.5 billion that’s about $300 million of capacity that we would have at 12/31. But then we also have our lease portfolio and as Morgan said based on how you characterize the lease portfolio, you could add an additional 10% onto that limit. So, we really have about a 30% limit of assets for our commercial portfolio, or about $450 million.
And so there is room to grow, but if we continue at this pace, we will but up against those charter limits at some point and it depends on whether the growth is coming from large commercial or small commercial. That plays into how quick we get to those limits. So there’s still some room, but as Morgan mentioned, it’s being evaluated and we’ll have to make a decision from a business plan perspective what makes the most sense to allow for our growth going forward.
Okay. Thanks, Paul. And I guess just to be clear, the $450 million that you talk about maybe added capacity for – I mean, that where are you relative to that that level today? I guess is it – if I just look on the five quarter…
F. Morgan Gasior
If you add up leases in commercial, we’re right around $350 million now.
Yes, about $100 million?
F. Morgan Gasior
Yes, so, again, there’s at least $100 million of room or potentially a little bit more depending on how the credits get classified within these buckets. But, again, if we continue to do what we’re doing, we’ll start to edge up on that. So – and probably something else to think about charters is we’re running businesses – healthcare is a business that’s based on a nationwide platform.
Commercial leasing space is on a national platform. So the thrift charter is a federal charter. It probably makes sense for us to evaluate – since we’re operating in all 50 states, especially on the C&I side where this is a greatest concern, the ability to maintain the, among other things, preemption power – preemption capabilities and the powers inherent to a federal charter are important to us.
Yes. Okay, understood. I appreciate the color there. That’s helpful. And maybe just onto the margin for a minute and that was just the – I mean the loan growth didn’t seem to come at the expense of the margin in the quarter. I guess, can you just talk a little bit about the loan yields you’re getting and just the ability to support the margin kind of at the – at the current level as you continue to put on, I guess, what seems to be some pretty good growth here over the next 12 months?
F. Morgan Gasior
Yes. I think the story there is going to be very sensitive to the yield curve. To the extent that we’re seeing an expanding yield curve, a parallel shift upwards, it helps on a number of fronts. It helps with repricing loans. Instead of repricing them down, they’re repricing flat or maybe up a little bit. To the extent that the yield curve is a little steeper or maintains a certain amount of steepness, it provides that duration arbitrage opportunity.
And we’re also doing our very best to do as much in floating rate loans at a reasonable margin to protect the net interest margin percentage. But as we said last year, our goal is to continue to grow earnings per share, so if the opportunity is to grow net interest income and not necessarily worry about the net interest margin percentage, we’ll do so. But we’re not indifferent to the net interest margin either.
So there’s a floor under which we’ll do deals, especially given the return on capital – 100% risk-weighted capital loans. We’re a little more interested in participating on price for 50% risk-weighted assets. We’re even more interested for 20% risk-weighted commercial assets. So with those in mind, I would say I wouldn’t be surprised to see a certain amount of margin compression in percentage terms during 2016 given the relatively high-quality loan portfolio we have and will maintain. But we do think we have some tools in the box to defend it. But given a choice, we’ll pick growth in net interest income over just maintaining the margin for the right transactions.
Okay. And the growth this quarter, I mean, I guess it’s the ability to support the loan yields this quarter. I guess it seems as though if you’re putting on variable rate loans, they oftentimes come on at a lower rate initially, but to give you the rate protection obviously if rates go up. Was that the case this quarter? I guess it just seemed like the – or was there anything unusual, loan fees or something in there that helps support the margin if you are putting on some of these more variable rate loans I guess that could have lower yields initially, but…
F. Morgan Gasior
I would say part of it is the diversity in what we’re working in now. We had a very diverse group of originations in commercial leasing and that provided a range of yields in that portfolio. We had a diverse range of originations in multi-family and that had a diverse range of yields. We did book more variable rate loans, but the margins on those variable rate loans tend to be positive in terms of spreads say to prime as opposed to LIBOR. That said, we had a handful of loans that were on LIBOR that were, to your point, probably a little bit thinner on the yield to start, but they provide the yield production.
So that’s where we see our safety is in the diversity of the originations we have and the product structures. And probably one thing to note is the stronger we get – we made some good progress in 2015, but there’s still a road ahead of us – the stronger we get in originating core products for a real estate investor, or a core product for a commercial lessor, or a core product for a C&I company, the stronger and closer we get to that, the better we’re going to do, especially in this environment. So the gradual shift in favor of core products as opposed to simple transactional benefited us in 2015. We are certainly hoping to continue that trend in 2016.
Okay. Perfect. And maybe just a little bit on the expenses and credit quality. Credit quality, I guess one thing I wrestle with is the non-performings are at very low levels, as you indicated, but yet you still carry this expense on the OREO side that is evident in about $0.5 million in the quarter. I guess can you just reconcile, I mean, if you are getting down to the point where you are at a minimal level on the non-performings, when do you see a tail-off in that OREO-related expense and just kind of how to think about that – I know it can be a bit lumpy – but just how to think about when that expense should be able to kind of match what we’re seeing the trends on the credit side, which are certainly very impressive?
F. Morgan Gasior
Well, we’re glad you like them. But on the OREO side, you’ll note that the balance has stayed relatively constant year-over-year and that’s due to our desire to accelerate the resolution of these and bring forward those expenses. So in a number of cases where we see it makes sense, we’ll go ahead and accelerate the resolution possibly through a deed in lieu, except the expenses and in some cases, in one case in the fourth quarter, took our largest nonaccrual loan – and we did this in the space of three weeks – we took our largest nonaccrual loan, converted it to an OREO through a deed in lieu and then sold the property to an unaffiliated investor.
We recorded a hit to do so, tens of thousands of dollars, but given the holding costs of some of those real estate, especially in the Chicago market with real estate taxes alone, when we look forward, we said this is absolutely the right thing to do. So it certainly accelerated the recognition of some of those holding expenses into 2015, but it certainly protected the 2016 numbers.
So when you look at 2016, I would say we should cut those expenses at least and half. It’s also the case that the remaining assets in the portfolio are positioned to sell. Everything that’s out there we’ve already had on the market in 2015. We’re hoping that – if we had $7 million or so in OREO at the end of the quarter, if we can knock that down $2 million to $3 million a quarter, that’s further going to reduce the expenses because the assets are gone.
So will we carry some OREO? Yes. Can we see some OREO expenses, just the holding costs in Chicago are just expensive and can you still see some marks? Sure you can, especially on the residential stuff. You just don’t see the residential market here in Chicago all that strong and it’s also the case that you’re still seeing a nominal modest amount of strategic defaults in the residential portfolio. So, again, if you looked at our 2015 OREO expenses, we should easily be able to cut those in half given how we’ve positioned it, but we’re not going to be able to eliminate it completely.
I got you. Okay. Perfect. And just the other piece on the expenses, as you talked about the compensation, the equity piece. I guess can you just elaborate a little bit on, I guess, how to think about that I guess going forward. I guess it seems like if it’s incentive comp, it’s kind of part of the core business if you are incentivizing these guys to go out and do the lending. So it seems like it’s incorporated into it.
Maybe it was just the accruals in the quarter or just – and I guess I would think that’s kind of baked into the number as far as if you are expecting 10% loan growth this year, you’d kind of have budgeted in there that you are going to have to – there’s a certain amount of incentive costs, but it sounds as though you think it’s treating it more non-core than core and I guess I’m just going to understand that and just how to think about it.
I know in the past you’ve talked about this number on the expense side potentially going higher if you bring people on and add staff, I guess not necessarily for the incentive piece as maybe it kind of occurred this quarter or maybe I misunderstood how you were referring to the outlook.
F. Morgan Gasior
On total expenses, we still see a range between 39, 39.5 on the low side and 40.5, 41 on the high side. Part of that will be volatility in comp expenses and a few other things, but that’s the range. It’s been the range for a while and, as I said earlier, the base comp was running well within budget. In looking at incentive comp, it’s important to draw the distinction between cash incentive comp and equity. We will have an equity expense in 2016 of about $1 million. It was structured according to the ISS standards, but it will run off at the end of 2016. About half will be gone at the end of the second quarter of 2016 and the remainder will be gone at the end of fourth quarter of 2016. And at that point, it will be gone completely.
So when you are running a 2017 number, take $1 million of comp out of that number because the equity stuff will be fully vested and gone. I can’t speak for what the Board is thinking about that, but, at this moment, we don’t have anything else budgeted for equity. On the cash side, when the metrics are met, we will accrue. When we saw the pipeline getting as strong – the closings as strong as they were – we absolutely knew we had to get on the stick to make sure that this was properly accrued at fourth quarter and when we hit our asset quality metrics, deposit metrics, earning metrics, a few other things, then some of the management incentive stuff kicked in the fourth quarter.
So all those things kind of came together, the cash comp generally for loan producers is accrued quarterly, so we had an accrual growing into the third quarter, but, as you saw, since most of the loan growth occurred in the fourth quarter, we put the money away and since most of the loan growth did not necessarily contribute absolute dollars to net interest income in the fourth, there was a bit of a timing mismatch. But going into 2016, given the strength of the pipeline, we’re certainly hoping we have a good solid accrual for first quarter in incentive comp, but that also means we contributed net interest margin for the quarter and it’s going into second quarter.
So if things break our way a little bit on timing, you’ll see a little bit better alignment of cash incentive comp to net interest margin growth, or noninterest income growth, deposit operation, our branch operations have incentives aligned for growth in noninterest come. Growth and deposits for growth in noninterest income, growth in deposits, core deposits, growth in core relationships. So if all the wheels are turning and the cylinders are clicking then we should see positive momentum on the income side and that will be matched off by the cash incentive comp. So the equity incentive comp is kind of a nonrecurring one-time thing, $1 million for 2016. It will be gone by the end of it $1 million total. And then the cash stuff is going be based on performance.
Okay. And that equity comp in 2015, that’s in the five quarters up limiter? Do you know what that number was? Is it a comparable number to the $1 million that you are thinking for 2016?
F. Morgan Gasior
There was $650,000 for 2015 it will be a million for 2016 and that has gone.
Okay. And then just so I understand it, the range of total expenses is 39 to 40 or 39 to 41. Does that include – I guess my assumption is that includes the accruals you’re anticipating for projected loan growth. So if you get above the 8% to 10%, I guess you could expect that the number could potentially fall outside of that range, but if it was in that band of what you’re thinking right now, the accruals would be part of that?
F. Morgan Gasior
Okay. Got you. Okay. That’s helpful. And then maybe just to the fee income and – sounded as though the insurance was obviously seasonally strong in the fourth quarter, but how are things going on the fee income side? I know you guys had done a few things during 2015 that kind of better positioned that for some pickup in future quarters. I guess anything that you can share as far as initiatives and how they are proceeding, or just how to think about the fees as you go into 2016?
F. Morgan Gasior
Yes, I think on fees, I expect a little bit more volatility than I might have a year ago. The positive news is that with the deposit portfolio realignment, we’re seeing more recurring fees on customer activity related to monthly maintenance or statement activity things that customers want. They are able to customize their accounts and we picking up some revenue based on that account customization. If they want it a certain way and they are willing to pay for it, we absolutely support their initiative.
So it allows them to pick from a menu more so than have a package. Secondly, we will see some growth in income on account usage, but that’s going to in part depend on how the economy goes and how we do originating new accounts under the new products. Probably the offset that I’d be a little concerned about right now, as I said earlier, is the decline in ATM and debit card usage.
These other payment structures, smartphone pay structures, are eating into that. There’s just no question about it. There’s another variety of initiatives to help encourage ATM and debit card use, but, it’s, I think, not necessarily saying that we’re going to be growing it. I think we’re going to try to stabilize it at these levels and see if we can prevent further declines. Not everybody has a smartphone. Not everybody is comfortable using it and we still have a certain cross-section of the customer base that isn’t comfortable with ATM and debit cards.
And every time there is a compromised card situation, it tends to undermine that confidence a little bit. So I’d say the biggest challenge we have in front of us is to see if we can stabilize ATM debit card revenue. The biggest opportunity we have in front of us is to continue to grow the core, the low balance core account relationships where customers need the basic banking service at an attractive price with all the different menu options that they want. If they want electronic banking, they can have it; if they want overdraft support, they can have it. If they want sweep support, they can have it. So it’s kind of a have it your way approach and see if we can take some business away from some of the larger banks who aren’t as interested in these customers as we are.
Okay. And back to the funding the loan growth in the quarter on the deposit side, just talking about that. Is your expectation you fund the – the loan to deposit ratio is a little bit north of 100 today. I guess just how are you thinking about that as you originate the loan growth, the majority of the current growth will be funded via the core deposit franchise?
F. Morgan Gasior
Yes, we would expect so. That in part will depend on layering the ALM balance. We finished up year very slightly asset-sensitive. You look at a range of possibilities. So at the worst neutral and some were asset-sensitive. We absolutely want to maintain that posture. So we would expect the majority of our funding on our loan to deposit ratio to stay around 100% and therefore the majority of funding to come from deposits.
Our first preference is to take deposits from local customers. That’s the part of the franchise. So the initiatives in place include obviously attracting new customers, but doing as much share of wallet with existing customers and taking advantage of our opportunity to say, hey, do more with us and here’s a good reason why. But we’re not averse to – if we’re not getting quite the duration matching that we want out of the core deposit portfolio, we’re not averse to doing it with wholesale funding, brokered CDs if we need to so we can target the maturities we need to make everything work.
And we’re not averse to doing a little bit with advances. So for example, in the multi-family portfolio, you have a significant pool of 50% capital-eligible loans that are in the Federal Home Loan Bank borrowing base. If we need to match off durations and have [indiscernible] we can do an advance. We can even do an amortizing advance to match off the cash flows and protect that interest rate risk position as we need to. So the vast majority of the funding growth should come from core deposits, but it will be leavened as necessary with other techniques designed to keep everything in balance.
I got you. Perfect. And then just the last two, the buybacks you talked about wanting to get down. Just remind me, I guess, where the buyback is today. I guess it sounds like you re-upped it. I guess I didn’t catch what you said there as far as the activity and kind of what you’re expecting for 2016?
F. Morgan Gasior
Well, the Board did two things. First of all, you saw that the dividend was increased from $0.04 to $0.05 a quarter last week. And the second thing is, late in the year, the plan was about to expire and the Board considered where we were on capital and performance and what market conditions were looking like and decided to extend and expand the program. We start 2016 with 20,200,000 shares outstanding. So when the trading window opens, that’s our starting point.
And we believe that it should be feasible – again, it depends on market conditions – but it should be feasible to get the total shares outstanding to 19 million during the course of the year. Is it possible to go beyond that? Sure, but they are going to have to do another evaluation and let’s get there first and then we can decide what happens next. So really about a 6% buyback from the starting point today to the end of the year is something that we’re set up to do. Going beyond that is going to be a function of how everything else is looking in terms of capital adequacy, stress tests, market conditions, but that’s the direction.
Okay. And when you extended it and expanded it, I guess, what were the dynamics there? So it was initially at 5%. You didn’t run that 5% fully and then you – you still carry with you that piece from that and then you added to it or…
F. Morgan Gasior
Right. That’s how we got to about 6% is we didn’t quite get all the way at the end of the year. We even extended the window a little bit, but we just couldn’t quite get it done all the way in the market conditions we were seeking. So we carried the remainder over and then we added to it.
Got you. Okay, all right. I think that probably covers most of what – just the last thing was just from a reserve standpoint, obviously, with the credit quality improvement; you’ve been able to drive down the reserve – the continued health of the portfolio. Then I guess can you just talk a little bit about how you’re thinking about the reserve and as you proceed with maybe growing a bit more on the commercial side whether that entails beginning to provide for that growth going forward and if you’re kind of seeing – getting to a bottom where you still feel like there’s continued credit leverage based on the health of the portfolio.
F. Morgan Gasior
I would say it’s probably wise to expect that the provision would be neutral on the low side and maybe up $0.5 million or so on the high side. Again, as you saw 271% coverage, so it’s a very good place to start. The mission of the Company is to continue to originate assets that present low credit risk characteristics and we’re also becoming increasingly – I’m going to go with fanatical about credit administration to stay on top this portfolio as it grows.
Again, the uncertainties in the economy and the lessons of the great recession just mandate that you do as much as you can on portfolio management tracking. But, for us, we think that, given the performance of the portfolio over time, the nature of the assets themselves, that we’ll probably need – if everything – all the cylinders click – we’ll probably need a modest provision in 2016. We could note every once in a while see a little of recovery as the loss ratios in some cases continue to improve, but neutral to a modest provision in 20116 based on the assets that are generated will be probably the right range.
Okay. And just to be clear, I guess it sounds as though you are more focused on the reserves and non-performing loans rather than the reserve to loan numbers. Is that probably more front and center than the reserve…
F. Morgan Gasior
Not necessarily. The formulas, the provisions are based on historical loss ratios, inherent factors, national and local economic factors and when you add all those things up, two things are helping us right now. The first thing is that the portfolio performance continues to improve and that the segments, the business segments we’re in continue to perform well and their inherent characteristics are strong and the markets that we’re in, the national local economic factors are strong. And as long as those remain constant, we should enjoy a relatively low requirement for provisioning on new credit.
We probably won’t see that much more contribution in terms of reserve recapture from the existing portfolio, but we also shouldn’t need much provision on the new portfolio. The variable is, to the extent that we book recoveries, some of the recoveries we booked were actual cash recoveries. I think we had about $700,000 in recoveries for 2015 and that’s just going after people and collecting the money that they owe us. That’s a smaller base now. We would expect that to diminish. But it’s not inconceivable you could see a small negative provision in one quarter, but then that would be followed by a small to medium-sized provision due to growth in the following quarter.
Got you. Okay. That’s perfect. And you mentioned earlier, as far as your sensitivity, kind of where you are thinking about things. Remind me, just from an asset sensitivity standpoint point, where you guys are at. You’re pretty neutral. Is that what it sounds like? Or slightly asset-sensitive?
F. Morgan Gasior
Exactly so. We feel we have the right assumptions as far as deposit betas and we note that even with the Federal Reserve move, our competitors did almost nothing. And that seems to be confirmed by some of the peer data we’re seeing on a regional and national basis. But you can’t necessarily that that’s always going to be the case. So when we run our numbers, there’s a few things that again seem to be working in our favor.
We run what we believe are realistic deposit betas and so we don’t take our customers or the market for granted. But an important fact in this is we have a fairly strong liquidity position and the nature of the portfolio that we have provides even more liquidity for repricing. So as you’ve seen, and you’ve commented actually in previous calls, that, at times, the net quarterly loan growth can be modest to even slightly negative principally because of the payoffs we’re getting and the cash flows, but that’s an advantage in a rising rate environment for us.
So, that’s all those components are why we think were neutral to slightly asset-sensitive. It could be – it would be fairly easy for us to become very asset sensitive. We just stop originating loans. But, obviously, other things suffer when you do that. So we feel we’ve got a good balance. We feel we have tools to manage if we do see some growth that needs some hedging. There are a couple of different tools we’re not currently using that we could use and we may even roll out something where, if we are in a lower for larger environment in the middle-part of the yield curve, say 7 to 10 years, we have certain competitors that are swapping out at the customer level for larger multi-family transactions and one of our projects for the early part of 2016 is to offer that capability to those customers.
So it gets a little more complicated for that customer, but if they’ve got good exposure that’s planning on holding the assets for a long time, it’s a buy and hold play for them, then it might make sense for us to say, okay, let’s get swap arrangement into place where you have [indiscernible] on the loans. We have swap protection on the asset. They get a very good rate. We swap it out. It will turn into one of those assets that you mentioned, a relatively low initial rate, but a floating rate and that’s another reason why we think we can maintain the asset sensitivity that we need going forward and still execute the business plan.
Okay, that’s very, very helpful. So that’s all I had, guys. Thanks for the time and taking the questions.
F. Morgan Gasior
Thanks. Good questions.
Thank you. [Operator Instructions] Our next question comes from the line of Scott Levitt, Private Investor. Your question please.
Good morning and congratulations for the fine results for Q4.
F. Morgan Gasior
I have a couple of questions/comments. In terms of your brick-and-mortar results, given that the financial institutions today have fewer and fewer walk-in customers, have you considered closing or reducing the size of your brick-and-mortar stores?
F. Morgan Gasior
I’d say a couple of things to that. First of all, one of the initiatives for 2015, especially into 2016, is to work on increasing traffic. Accordingly, one of the things we did in 2015, and it’s starting to show some results in 2016, is reposition wealth management. So there are licensed representatives with greater capabilities and a broader product array, and you need a branch environment for that type of consultative selling. It’s also the case that with the product realignment we did in deposits, the branch environment is still transaction-oriented for customers who either are not capable of or not comfortable with the electronic world that certain other customer bases, certain millennials are more embracing.
And not all millennials are accretive alike. They have different socioeconomic backgrounds. They either don’t have the tools or the money to invest in smartphones and data plans and so they need the more traditional branch service. So the way we look at branches at the moment is as regional service centers. In some ways, we don’t understand how some of our competitors can put a $3 million or $4 million branch on almost every corner like a gas station. But in our world, if we’re using that branch for transactional support for high-value customers, whether they’re high-value balance customers or high-value revenue customers, whether on the deposit side or the wealth management side, that’s an effective use.
Now we did focus on the absolute cost of running the branch. So we’ve optimized the staffing levels, but we’ve also optimized the experience and the capabilities levels within those branches in the last six quarters or so. Chicago is a relatively expensive market to hold real estate and if you look at some of the branches, just the real estate taxes alone, I think three branches account for 40% of the real estate taxes, but they also account for 35% of the deposits. So there’s really nothing to do there. We’ve thought about sales and leasebacks before. Really that’s a play to releverage the cash into earning assets, but then when you run the occupancy costs on that and you pay the profit margin and the overhead of the lessor, you’re really neutral to probably not making very – to maybe even down a little bit in terms of your efficiency ratio.
For the smaller branches, if you look at those, they are still important regional service centers. They also have room for more growth now that we’re in a deposit growth mode. We haven’t been in a deposit growth mode for almost four years given the liquidity position we had, and those branches are still relatively cost-efficient. It would not make a material difference to our earnings to close one or two of them and it would compromise our ability to service customers in those regions. And it’s worth noting that even those smaller branches, since the focus has been on core deposit relationships, they are extremely low-cost funds and they would be hard to replace even in the quantities that are in them.
So it’s a good question because you look at the size of the branches, you look at the trends in the industry and you say is this something you should continue and we have taken a very hard look at this. Having said that, I can’t imagine us ever building another branch. We even experimented with the express branch scenarios and providing a more electronic and even a television – a televideo service and really customers didn’t do that well with it. They didn’t really want to take the trip. So I think the odds of us building another branch are pretty low. We’ll probably look at more things like Skype and other types of capabilities to extend our presence. We’re doing more with chat, for example, than we have been. But the chatting is still a very small percentage of our customer service.
So at the end of the day, we would expect to keep the branch environment we have. The mission is to optimize it, especially on the revenue and the traffic side. We feel good about where the expenses are on them and let’s see if we can get them more efficient, improve their efficiency ratio from the revenue side because we think we’ve done just about all we can on the expense side.
Thank you. A second question, and it’s really an extension of your wealth-based services. I assume that the fair market value of the commercial real estate portfolio has to exceed $1 billion and using a rough estimate of a minimum of 3% real estate taxes based on the value of the property that would indicate that real estate taxes of at least $30 million per year are being paid. Have you considered offering a real estate tax assessment challenge service as an extension of your wealth management services to offer to your commercial customers?
F. Morgan Gasior
We actually have thought about that. It goes to the point of what can you do more for customers. So some of the things we did in 2015 is we actually started to conduct seminars and we published a white paper on this for some of the real estate customers on how to manage your real estate taxes and even insurance and some other expenses. So the real estate tax side, typically the way that works is you retain counsel and that invokes a fiduciary attorney-client privilege so we can connect parties, but it would require us almost to practice law in certain ways and obviously that’s something we’re not licensed for. I am personally, but it’s not something I’m going to be able to do for customers. But at the same time, that’s why we continue to try to work on our property and casualty side.
When we see a loan come in, can we put a quote on their property and casualty insurance, can we put that in their escrow payments instead of one lump sum premium every year? We can do it on a monthly basis. Can we save them some money? Can we expand their coverages where their existing carrier didn’t really think to do so? So that type of cross-selling is important to us. The real estate tax side gets a little tricky because of the fiduciary obligations, but it’s an opportunity we should be looking for at least on the educational side.
That’s fine. I think it would make sense to also look at the qualifications because I don’t believe that you’re required to be a lawyer to represent customers in real estate tax assessment challenges.
F. Morgan Gasior
I agree. It’s not technically required, but typically there are a handful of law firms that have the relationships with the assessor’s office. They know the mechanics and for example, we retain counsel to do it. They are very effective. That’s how we keep a lid on it. But absolutely and especially in some other jurisdictions where it’s a more routine basis, we’ll take another look at it and see if there’s something we could do because certainly any customer who sees us as a contributor to saving them money makes us that much more of a core relationship and it’s to our benefit.
Well, I guess my thought process is that lending institutions are effectively commodities and in terms of offering something that’s new and extremely profitable, that’s not going to happen. The only way is to offer ancillary services for modest growth of profitability. So effectively contingency services would offer that amount of marginal profit enhancement with a fairly low investment in terms of staffing…
F. Morgan Gasior
I absolutely agree with that and that’s one way we started some of the initiatives we have, but just thinking about your question as I sit here a little bit and computing the money we pay to our outside counsel, saving taxes for the organization itself, I’m giving some more thought to what you’re thinking about. Maybe there is a way to do it ourselves. So feel free to – give us a little time to think this through, but feel free to follow-up with us.
All right. Well, thanks for listening. I appreciate it.
F. Morgan Gasior
Our pleasure, any time. Keep them coming.
Thank you. [Operator Instructions] And this does conclude the question-and-answer session of today’s program. I would like to hand the program back to Morgan Gasior, Chairman and CEO.
F. Morgan Gasior
Thank you all for your questions and participation and your interest in BankFinancial. We feel we ended 2015 on a strong note and we look forward to 2016 Hopefully, market volatility and other events will abate and we’ll have a good progressive year for all of us in 2016. In the meantime, we won’t speak to you until spring so enjoy the rest of winter and look forward to better weather.
Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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